http://www.jewishworldreview.com --
A LOT OF PEOPLE are talking about a lot of issues. Some have merit, others
don't. Tight money is a problem. So is the tax cut veto. So is the Justice
Department's attack on the tobacco industry. And the Microsoft anti-trust
actions.

But the dollar is steady, not weak. What's more, I wish everyone could have
trade deficits. In our era of hi-tech price stability, trade deficits infer
prosperity. So let's try to sort all this out. Eventually, it's going to
have a happy ending.

We know this year's stock market has been heavily burdened by Fed tightening
and the constant threat of more to come. Everyone's been talking about this;
indeed obsessing over it.

Alan Greenspan's first tightening signal in early May effectively stopped a
huge winter/spring rally. The market recovered after that, but Greenspan's
Congressional testimonies in July knocked down the Dow by about 600 points.
Not just the threat of more light taps on the monetary brake, but his public
anti-growth and anti-stock market message has tied a ball and chain around
the market's ankles.

Ironically, the alleged market bubble has already been punctured. The major
stock market indexes are going through one of their periodic rolling
corrections. Like the autumn of 1998, or the summer of 1997, or the Fed
tightening period in 1994.

During long-wave Schumpeterian technology cycles, the economy, productivity,
real wages, real incomes and the stock market all grow above trend.
Inflation and interest rates come in below historical norms. Recessions and
bear markets come and go, but they are muted. Like the 1990 bear market
recession: relatively shallow and short-lived.

So, the big bear is muted; replaced by a recurring series of little bears.
All very healthy, especially if you believe in family values.

Take this year's little bears. More than half of the S&P 500 stocks are down
year-to-date, and more than one-quarter of the listed New York Stock Exchange
and NASDAQ companies are well below their yearly highs. Internets have been
slaughtered. Greenspan should be very happy.

But there's more right now than Alan Greenspan and the Fed sopranos. For
example, one thing nobody's talking about is the stock market impact of
President Clinton's tax-cut veto.

When Congress passed a broad-based pro-investor tax cut bill in late July and
early August, the Dow moved from 10,600 to nearly 11,400. Supply-siders
estimated that inflation-indexed capital gains, estate tax elimination,
expanded IRAs, an end to the alternative minimum tax, health insurance
deductions and income tax-rate relief would add as much as one-half of one
percentage point to the long term economic growth rate, with derivative
benefits for risk-taking, capital formation, productivity and profits.

And long-term wealth creation that would be capitalized into higher share
prices. But after President Clinton returned from New Zealand in early
September, with the Dow above 11,000, and he proceeded to totally trash the
tax-cut proposal (after Greenspan had trashed the stock market two weeks
earlier), the market headed down. It hasn't stopped yet.

Not only is the President relying on the usual liberal-left class warfare
argument ("too much relief for the wealthy"), he wants to keep the money for
all his pet spending programs ("it would leave too little money for important
programs"). Remember, the President's budget includes roughly $150 billion
in additional social spending, with a Medicare and free drug prescription
entitlement plan that would sum to nearly $1 trillion over the next decade.

So the first big test in the era of surplus politics produces a government
victory and a free enterprise defeat. Tax rates will not be cut, and
government will expand.

The surplus revenues will not be returned to the people who earned them in
the first place. Of course the stock market would react negatively to this,
even if most economists and pundits and television announcers don't get it.

More goofiness from Washington comes in the form of the Justice Department's
RICO-based lawsuit against the tobacco industry. This is a blatant
abrogation of corporate private property rights. The stock market hates it.

It is political retribution from the Clinton administration because their
Federal tobacco tax hike was defeated. Of course they want to extract
another pound of flesh from tobacco, even after the state lawsuits, in order
to grab more revenues and expand spending.

Then, too, Assistant Attorney-General Joel Klein has been out bashing
Microsoft as the Federal court hearings have finally come to an end. News
stories report that Mr. Klein and his merry band of anti-trust anti-growth
re-regulators have been traveling around the world trying to persuade foreign
governments to sue Microsoft. This too sends a chill through all technology
stocks.

Next year the Investor Class will vote its portfolios in favor of lower
taxes, deregulation and market solutions; that is why Gov. George W. Bush is
running way ahead of Al Gore and Bill Bradley. But in the meantime, stock
markets are registering their disapproval of the tax veto and the
heavy-handed government attacks on business.

I believe the Republicans in Congress are giving up too easily on taxes.
This is a tax bill where the sum of the individual parts is greater than the
whole. Each part should be voted on; let Messrs. Clinton and Gore veto every
pro-investor tax cut plan, if they dare. The GOP ought to run national ads
touting the individual parts and linking to the Internet economy by speaking
directly to the Investor Class.

As for King Dollar, it is still sitting on its throne. The dollar futures
index is only 4.5% off its high, and while hovering around 100 is 25% above
its 1995 low. Using the JP Morgan index the results are about the same.
Against the Euro, the dollar is very strong. Relative to Canada and Mexico,
our two biggest trading partners, the dollar is strong.

The Japanese yen is overshooting on the upside, but this is a high-class
problem. Following last spring's supply-side tax cuts, higher expected
economic returns in Japan are boosting the real yen exchange rate and the
stock market. Anticipating a healthier Japan, foreign capital inflows are
re-liquefying their economy and boosting asset values.

But the dollar decline relative to the yen is not spreading to the other
major currencies. So itís an overly strong yen, not a weak dollar. In
relation to gold, precious metals and non-oil commodity indexes, the dollar
remains strong and U.S. inflation remains low. Long-term Treasury rates have
peaked. This is a good story.

Finally, recent hysteria over the U.S. trade deficit is completely
unwarranted. Bearish economic banshees are on the loose again, arguing that
trade deficits will weaken the dollar and drive up interest rates. This of
course will collapse the stock market and force the economy off the
recessionary cliff.

And then perpetually pessimistic Keynesian demand-siders will finally be
proven right after all. Aha, I told you so. Prosperity is doomed.

Not so fast fellas. Consider this. The U.S. trade position has been in
deficit for nearly twenty consecutive years. But the economic results have
been splendid. Since mid-1982, when the trade deficit trend began, the U.S.
economy has produced 38.3 million new jobs with a real GDP growth rate of
3.3% per year.

Corporate profits have expanded by 9.4% annually, while the S&P 500 index
(adjusted for inflation) has increased 11.9% yearly, with a total return rate
of 16% a year. Unemployment has fallen to nearly 4%, while inflation is
nil. Roughly $26 trillion in new household net worth has been created.

All this while the big, bad, evil trade deficit continues. Imagine that. In
1982, real U.S. two-way trade -- exports and imports -- totaled $738
billion. Today the number is $1.6 trillion. Real exports over the past
seventeen years have increased 81%, or 3.5% per year. Real imports have been
even stronger, rising 128%, or 5% annually.

Imports have grown faster than exports because the U.S. economy has
consistently grown faster than the rest of the world. Increasingly we are
importing low value goods and exporting high value goods.
Interest rates zig and zag, but on balance the trend has been substantially
lower during the trade deficit era. Ditto for inflation. Meanwhile, the
dollar has also had its ups and downs, but on balance its value against a
large basket of currencies has been relatively stable. In relation to
domestic gold and commodity prices, the dollar gets stronger and stronger.

With this enhanced buying power, American consumers now have the online
Internet capability to search for and identify the highest quality goods at
the lowest available prices anywhere in the world. Because we have the
lowest average tariff rates of any major country, these goods and services
can be cheaply and easily imported. Families and businesses prosper as never
before. Free trade is more important than trade deficits.

The key point is that the rising combined total of imports and exports shows
what a healthy economy we have. The fact that imports have been rising
faster than exports is of no economic consequence. Actually, exports are
badly undercounted anyway. Small businesses don't fill out the requisite
forms, and software and related technology and communications exports are not
identified by the government.

In fact, the whole trade balance model that upsets Keynesian economists so
much is a quaint leftover from the 1950s, when the flow of goods from steel,
autos, heavy machinery and raw materials dominated world trade flows.
However, in today's nano-second Internet economy, where financial markets
rule the world, capital flows drive trade.

Over the past seventeen years, foreign capital inflows for portfolio
investment purposes (stocks and bonds) have increased by 19.3% at an average
annual rate. Inflows for direct investment in plant, equipment, mergers and
acquisitions have increased at a 15% annual rate. In total, net foreign
capital inflows have grown by an incredible $4.8 trillion.

The key point here is that foreign capital comes in search of a high rate of
return on investment. America's technology economy, backed by disinflation,
deregulation and low capital tax-rates, has consistently produced the best
investment returns in the world. That is why foreign capital comes here.
Foreigners are investing wisely.

No one holds a gun to their heads. Foreign capital arrives voluntarily.
Even our Army, Navy and Air Force couldn't keep this foreign capital away.
But repeated liquidity injections from foreign capital inflows have made our
economy even stronger, allowing investment to rise even more. And since we
produce to consume -- remember Say's Law of Markets -- high domestic returns
coupled with sizable foreign capital inflows leads to even more growth and,
yes, more imports.

Want to end trade deficits? Radically raise interest rates, or tax rates, or
tariff rates, or impose Nixonian wage and price controls. This will produce
a recession, or worse. So no one will import. Or do anything else
commercially. And the Keynesian trade balance crowd will be thrilled.

Of course, the five or ten million unemployed workers suffering the
consequences of these anti-growth policies might be forgiven if they scream
bloody murder and vote out the nitwits who launched these policies in the
name of trade balance. The 100 million plus Investor Class might also be a
little miffed while their portfolio wealth implodes. All this to pursue the
stale ideas of a bunch of defunct economists?

It may not be arithmetically possible in our medieval economic world of
national income accounts and balance of payment identities, where trade
deficits must eventually balance with trade surpluses, but in my heart of
hearts I wish that all nations could prosper to the point where they run
large trade deficits. It would be a sign of strong global growth.

Maybe we could set up a new trade account on the moon. It would perpetually
be scored as a notional trade surplus. Then the bean counters would be
happy, and the earth would be prosperous. Trade deficits everywhere.

I can understand market worries over taxes, tobacco and Microsoft. But I
don't for one minute believe that we are headed into an era of heavy
government regulation. The Investor Class will prevent that. Watch next
year's elections.

But I think people should recognize, or at least consider the analytical
possibility, that a strong dollar and wide trade gaps are consistent with
long-term economic growth and price stability. Employment, incomes and
profits are rising. The fundamentals of this economy remain solid; that is
the most important bottom line point. The Internet economy is more important
than the Fed.

Stock market corrections come and go, but the long wave of prosperity remains
intact. My liberterian friend Jim Glassman has just written a book
predicting a 36,000 Dow. My supply-side friend Chuck Kadlec has just written
a book predicting a 100,000 Dow.

In "American Abundance", which was published nearly two years ago, I
predicted an over 50,000 Dow. Naturally, we all like to hang out with our
friends. I believe my friends and I will be proven right.

This little bear correction will end before too long. Then there will be
stock
market bargains galore. Stay invested. Stay optimistic. Keep the faith.
Faith is always the
spirit.